SCENESETTER FOR A/S GORDON'S VISIT TO LATVIA

UNCLAS SECTION 01 OF 02 RIGA 000406

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL ECON LG
SUBJECT: SCENESETTER FOR A/S GORDON'S VISIT TO LATVIA


1. (SBU) Your visit to Riga provides an opportunity to
demonstrate our strong support for Latvia at a time when it
faces serious economic difficulty. It will also provide us
an opportunity to express appreciation for Latvia's effors
to maintain their NATO commitments during the current
financial hardships. You are scheduled to meet with Prime
Minister Dombrovskis and Foreign Minister Riekstins.
Dombrovskis has so far successfully held his governing
coalition together under trying circumstances. You should
offer support for his efforts while also calling for
significant structural reform. Riekstins will repeat many of
the points he recently made to the Secretary and will also
likely re-extend a request that you participate in this
October's "Riga Conference." (An invitation was recently
delivered by the Latvian Embassy in Washington.)

Economic crisis straining GOL
--------------


2. (U) After years of double-digit growth, Latvia's GDP has
fallen by 18% in the last year, forcing the GOL to seek
assistance from outside sources. In response, the IMF,
European Commission, and others offered a loan package,
dependent on austerity requirements, to the GOL. In June,
the parliament passed amendments to the budget, including
cuts in government wages, pensions, and social support
payments. The IMF wanted further assurances and negotiated a
Letter of Intent, signed by the government and the leaders of
coalition parties, promising further adjustments to the 2009
budget and strategies for deficit reduction in coming years.


3. (SBU) The government's exit strategy is adoption of the
euro by 2014, but they will be hard-pressed to meet the
Maastricht criteria of a 3% budget deficit. With the IMF
projecting double-digit deficits this year and continued
contraction into 2010, reaching the 3% target will require
painful fiscal adjustments. We have been supportive of
international assistance to Latvia, but have stressed to the
GOL that it needs to follow through with meaningful
structural reforms. You can expect that both Prime Minister
Dumbrovskis and Foreign Minister Riekstins will highlight the
efforts made to date and will ask for understanding for their
politically difficult task. In response, you should express
our support for Latvia, but emphasize that single-year
stopgap cuts will not be sufficient - long-term strategic
thinking, including contingency plans, will be critical.
(The IMF, in particular, is concerned that there is no "Plan
B" should Latvia find itself unable to follow-through on its
current strategy.)

NATO - Latvia active but seeks reassurance
--------------


4. (U) NATO lies at the core of Latvian security policy. In
the wake of events in Georgia last summer, Latvia (and
others) began to worry about the Alliance's commitment to
Article 5. They were reassured by President Obama's support
for NATO contingency planning, but remain nervous regarding
their security (including the course of U.S.-Russian
relations). The GOL was pleased that former Latvian
Ambassador to the U.S. and NATO Aivis Ronis was recently
chosen to participate in NATO Strategic Concept Experts Group.

5.(U) Latvia is a reliable friend and ally. Through multiple
deployments in Iraq and Afghanistan, Latvia has demonstrated
its support for trans-Atlantic security missions. It has
taken casualties in both operations, most recently when 2
Latvians were killed fighting alongside Americans on May 1.
Budget cuts have caused the Latvians to cease participation
in the NATO mission in Kosovo, the EU mission in Bosnia, and
the NATO Response Force, as well as curtail training and
procurement. The current focus is maintaining its commitment
to Afghanistan, where it has 120 troops serving in the
Norwegian-led PRT, 12 serving in various ISAF command
elements, as well as an additional 30 troops leading a joint
Operational Mentoring and Liaison Team with the Michigan
National Guard in RC-East. Despite further cuts in defense
spending called for by the IMF, the Defense Minister has
personally reassured us that Latvia will remain in
Afghanistan for at least the next several years.


6. (U) The GOL will also highlight Latvia's participation in
the Northern Distribution Network, where it serves as a major
transport artery for the shipment of non-lethal supplies to
U.S. forces in Afghanistan. Significantly, a survey team
from the Defense Logistical Agency will be in Riga the week
of August 10 to determine whether Afghan-bound supplies can
be sourced from within Latvia. If so, this will provide both
a needed boost to the economy as well as help the GOL bolster
popular support for Latvia's ISAF mission.


7. (U) Latvia has been active in supporting democracy and

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rule of law issues in ex-Soviet nations in the region,
particularly Belarus, Ukraine, Georgia and Moldova. It has
had to eliminate all funding for these programs due to the
economic situation, but is still actively seeking ways to
demonstrate its commitment to the cause and show leadership
in its "neighborhood." You should thank them for their
efforts and encourage them to maintain their dedication to
NATO and building the capacity of the other post-Soviet
republics.

Other issues
--------------


8. (U) Jewish Property Restitution: Latvia has a good
overall record on property restitution issues.
Unfortunately, however, the restitution of a remaining number
of communal and heirless private properties has been slowed
by a combination of politics, economics, bureaucratic
inertia, and some anti- Semitism. A 2006 agreement on this
issue fell apart at the last minute. The government has
created a task force to study the issue of communal property;
we have repeatedly urged that they move from study to action.
We recommend that you raise this issue in your meeting to
highlight the importance of finally resolving this painful
matter.


9. (U) Energy security: Latvia relies entirely on Russia for
natural gas imports, and will be losing a source of imported
electricity when the nuclear plant at Ignalina, Lithuania is
shut at the end of 2009. Thanks to large underground natural
gas storage facilities, and a relatively good relationship
with Russia on energy issues, Latvian gas supplies are not an
immediate concern. The GOL has made plans to build new
electrical generation facilities to help with short term
needs, and is seeking construction of links to the Nordic
electrical grid in the longer term. Plans for a shared
Baltic/Poland nuclear plant to replace Ignalina have not
progressed. There have been some positive signs in planning
regional inter-connections, but we should continue pressing
the urgency of moving past general agreements and into
implementation.


10. (U) Economic and trade ties: The United States is the 8th
largest investor in the country, and in 2008, American
companies were responsible for approximately 440 million
dollars in Foreign Direct Investment. Latvia has created a
business-friendly environment that is attractive to foreign
companies, although recent developments in Latvian economy
and a nearly complete stop to private-sector lending for
investment here has made the process of attracting U.S.
companies to Latvia more difficult. In addition, corruption
and rule of law issues are still major concerns in Latvia
that affect American businesses' decision to invest or do
business here.

ROGERS
ROGERS